Business activity worsens in Eurozone

3 mins read

In October, the Eurozone witnessed a notable deterioration in business activity, leading to job losses, according to a closely monitored Purchasing Managers’ Index (PMI) survey released by S&P Global. The PMI score for October fell to 46.5, down from the revised figure of 47.2 in September.

A PMI score below 50 indicates a contraction in business activity, while a score above 50 suggests growth. The decline in the Eurozone’s PMI score indicates a worsening economic situation, as noted by Cyrus de la Rubia, Chief Economist at the Hamburg Commercial Bank, which collaborates with S&P for the PMI. He expressed concern that the Eurozone might be heading towards a mild recession in the second half of the year.

This lackluster PMI reading adds pressure on the European Central Bank (ECB) to consider pausing its series of interest rate hikes at its next governing council meeting in December. Despite Eurozone inflation remaining above the ECB’s two-percent target, it is slowing, and economic headwinds are growing.

The Eurozone’s PMI score has now declined for five consecutive months, with the fastest rate of decline since November 2020. Private-sector activity in the Eurozone is shrinking at the fastest pace in a decade when figures from pandemic-affected months are excluded. New orders have dropped significantly, leading to job cuts. This represents the first decrease in headcounts since the early 2021 lockdowns. Manufacturing jobs are being shed at the fastest rate since August 2020, and hiring in the services sector has nearly come to a standstill.

Purchasing managers’ outlook for the year ahead remained weak, with only a marginal improvement in October. The situation in the Eurozone’s second-largest economy, France, showed a slower decline in the services sector, offsetting a sharper manufacturing decline. However, PMI sentiment in the Eurozone was declining at a faster rate than in the largest economy, Germany. S&P Global noted that both France and Germany have seen several months of declining output, while the rest of the Eurozone has witnessed three consecutive monthly declines.

The ECB has been gradually tightening monetary policy at its recent meetings, with the key deposit rate now at an unprecedented four percent. The conflict in the Middle East has introduced further uncertainty into economic forecasts, especially regarding the potential impact on oil prices. ECB President Christine Lagarde has recognized the difficulties faced by households due to the aggressive rate hikes but cautioned against any abrupt changes.

Analysts predict that the ECB is likely to pause its rate increases for the time being while maintaining a tight monetary policy for the foreseeable future. In September, consumer prices in the Eurozone rose at an annual rate of 4.3 percent, the lowest rate in almost two years. The International Monetary Fund has recently revised down its forecast for Germany’s economic growth, predicting a contraction of 0.5 percent in 2023, while the Eurozone as a whole is expected to achieve only 0.7-percent growth.